Comments on Bankruptcy and Equitable Distribution

August 8, 2017 § 3 Comments

Yesterday I posted about the Powell bankruptcy case and how it addressed the handling of equitable distribution in divorce when there is a pending bankruptcy proceeding. As promised, here are my thoughts:

  • I have heard it said that Powell is a big change fraught with implications for family law practitioners, but I don’t see that. The language cited from Professor Bell clearly states what the law has been. Powell does not change that.
  • Some may have misinterpreted the federal domestic relations exception barring federal courts from exercising jurisdiction over divorce to mean that all matters incidental to a divorce are included. The US Supreme Court, however, has made it clear that it is the granting of the divorce itself that is barred. Any matters pertaining to the property of the bankruptcy debtor are subject to bankruptcy jurisdiction.
  • The only way that a chancellor may proceed in divorce after bankruptcy is filed is for you to lift the automatic stay. You have to petition the bankruptcy court to remand all of the issues, as Jessica Powell did, even knowing that some will not be remanded.
  • Only problem is, per Heigle, cited in the Powell opinion, our supreme court has made it clear that the chancery court should stay all proceedings before it until the bankruptcy is concluded.
  • Even without Heigle to stop you from going forward, it’s obvious that if the bankruptcy estate is taken away, equitable distribution is impossible. If equitable distribution is impossible, alimony is impossible, since you can’t get to alimony without going through equitable distribution. If most of the assets are in the bankruptcy estate, that may well limit or even eliminate child support.
  • As I mentioned yesterday, I am no bankruptcy expert, but it appears that if you represent the other spouse (not the debtor), you had better file a claim for him or her in bankruptcy court right away to protect that client’s rights. You need to ask a bankruptcy expert about this.

Bankruptcy and Equitable Distribution

August 7, 2017 § 1 Comment

I am no bankruptcy expert, and my experience with its intersection with a divorce action is minimal. My impression, though, is that most lawyers think that if a bankruptcy action and divorce action occur at the same time, all one has to do is to file a motion to remand the case back to chancery under the “domestic relations exception” to federal jurisdiction, which bars federal courts from issuing divorce, alimony, and child custody decrees, and the bankruptcy court will fling the case back to chancery, where it belongs.

That isn’t quite accurate, however, as a recent case illustrates. The case is In Re: Zelius Welborn Powell, III, Debtor; Powell v. Powell, no. 16-51982-KMS, adv. no. 17-06008-KMS, rendered June 30, 2017, in the U.S. Bankruptcy Court for the Southern District of Mississippi. I’ve included as much citation information as possible because I can’t find an non-subscription electronic site for a link. The case is available behind a paywall on Pacer.

The case began when Jessica Powell filed for divorce against her husband, Zelius Welborn Powell, III (Trey). While the divorce was pending, Trey filed for bankruptcy. Trey had sold some stock, and the chancellor ordered that the proceeds be held in a restricted account and “frozen.” Later the funds were turned over to the Bankruptcy Trustee.

Trey removed the entire divorce proceeding to bankruptcy court under Bankruptcy Rule 9027, and Jessica countered with a motion to remand the case to chancery court. Following an adversarial hearing, U.S. Bankruptcy Judge Katharine M. Samson had this to say about chancery jurisdiction in these cases:

… The Supreme Court has held that “the domestic relations exception [to federal jurisdiction] … divests the federal courts of power to issue divorce, alimony, and child custody decrees.” Ankenbrandt v. Richards, 504 U.S. 689, 703 (1992) …

The domestic relations exception, however, does not divest this Court of all jurisdiction in this case. Federal courts “in which a case under [bankruptcy law] is commenced or pending shall have exclusive jurisdiction of all the property, wherever located, of the debtor as of the commencement of such case, and of property of the estate … .” 28 U.S.C. § 1334(e)(1) (2005). This exclusivity is not affected by a previously pending divorce action in Mississippi’s chancery courts.

When bankruptcy is filed after a divorce petition is filed but before the judgment of divorce, all assets titled in the name of the debtor spouse become a part of the bankruptcy estate. The state court action is stayed with respect to a property division. In Mississippi, a spouse has no property interest in marital assets titled in the other’s name until a judgment of divorce and equitable distribution. Under these circumstances, the nondebtor spouse becomes an unsecured creditor in the bankruptcy with regard to assets titled in the debtor’s name.

Deborah H. Bell, Bell on Miss. Family Law, § 21.06[2] (2d. ed.) (internal footnotes omitted).

. . .

To prevent confusion in this and future cases, the Court has gathered some Mississippi authorities concerning the jurisdiction and authority of a chancery court over property division when a bankruptcy case has been filed.

Family law and bankruptcy become most entangled when property division and bankruptcy coincide. A state court hearing a divorce action has the power to divide marital property equitably without regard to who holds title to the property. However, in Mississippi, a spouse has no interest in property owned by the other until a court judgment classifies the property as marital and orders a transfer of the property or a lump sum payment as part of equitable distribution … When bankruptcy and divorce occur simultaneously, marital property may include assets that are, or will become, property of the bankruptcy estate …

A state court may not classify and divide marital property without permission of the bankruptcy court. However, a spouse who files a divorce action seeking property division is asserting a claim against assets held by the debtor spouse and arguably at the moment of filing divorce becomes a creditor with an unliquidated claim against the estate. The spouse may file a claim in the bankruptcy and seek relief from the stay for the court to determine the she of assets to which he or she would be entitled outside of bankruptcy. Or, the state court may cho[o]se to proceed with the divorce and other aspects of the proceeding and reserve jurisdiction to divide the property after the bankruptcy has concluded.

Bell, supra, at § 21.03[3] (internal footnotes omitted.

The Mississippi Supreme Court has held that while a husband’s primary asset (a partnership) was in bankruptcy, the value of that asset was unknowable, and therefore the chancellor’s “decision to grant [the wife] a property settlement and/or lump sum alimony was premature … .” Heigle v. Heigle, 654 So.2d 895, 898 (Miss. 1995). The Mississippi Supreme Court has also held that other than the question of the divorce itself, which was undisputed, “all of the remaining issues should have remained in the trial court pending the conclusion of the bankruptcy proceedings.” Id; see also Dunaway v. Dunaway, 749 So.2d 1112, 1120-21 (Miss. Ct. App. 1999) (automatic stay of bankruptcy proceeding enjoins actions affecting bankruptcy assets).

The bankruptcy court granted Jessica’s motion in part, remanding the issues related to divorce, alimony, and child support to chancery, and denying it and retaining jurisdiction over issues involving assets of the bankruptcy estate.

That’s enough for now. I’ll comment tomorrow.

The Importance of a Hold-Harmless Clause

January 27, 2015 § 1 Comment

Jeremy and Tiffiny Moseley entered into a property settlement agreement (PSA) that was incorporated into their 2000 irreconcilable differences divorce judgment. One of its terms was that Jeremy would have “exclusive use and possession of the 1998 Chevrolet Camaro,” and that he would be “solely responsible for the payment of all debt, insurance, and taxes associated with said vehicle. The agreement also provided that Jeremy would “hold [Tiffiny] harmless for any debt associated with said vehicle.”

Following the divorce, Jeremy filed for bankruptcy in Arizona, where he had moved. He listed as a creditor the lienholder on the Camaro, Trustmark, but he did not list Tiffiny as a co-debtor or separate creditor based on the hold-harmless language. Jeremy was discharged in bankruptcy in 2001. [Note that this was a pre-2005-amendment non-support obligation that was dischargeable in bankruptcy]

Trustmark sued Tiffiny and obtained a judgment against her for more than $15,000, plus interest.

Tiffiny sued Jeremy for contempt for non-compliance with the hold-harmless clause. The chancellor held that the bankruptcy had no effect on his obligation to Tiffiny under the hold-harmless clause, and awarded her a judgment against him, plus interest and attorney’s fees. He appealed.

In Moseley v. Smith, decided December 2, 2014, the COA affirmed, and Judge Maxwell’s opinion includes some significant language about hold-harmless clauses that you need to file away for future use:

¶16. We begin with the bankruptcy issue. Moseley seems to treat his financial obligations involving the Camaro as a singular debt—a debt he owed to Trustmark, which was discharged in his Chapter 7 bankruptcy. But Moseley actually had two debts connected to the Camaro—(1) the debt to Trustmark bank to repay the car loan, and (2) the contingent debt to Smith, which would arise if Trustmark went after her for repayment of the car loan. While Moseley listed the first debt to Trustmark on his bankruptcy petition, he omitted his second debt to Smith. He also failed to otherwise notify Smith that her rights as a creditor may be affected by his bankruptcy petition. Thus, his debt to Smith was not covered by his bankruptcy discharge. See In re Hill, 251 B.R. 816, 821 (Bankr. N.D. Miss. 2000) …

¶17. In bankruptcy terms, the provision in the property-settlement agreement that Moseley would hold Smith harmless for any debt associated with the Camaro “create[d] a ‘new’ debt, running solely between the former spouses.” In re Jaeger-Jacobs, 490 B.R. 352, 357 (Bankr. E.D. Wis. 2013) (citing In re Schweitzer, 370 B.R. 145, 150 (Bankr. S.D. Ohio 2007)). Under the version of the United States Bankruptcy Code in effect during Moseley’s 2001 bankruptcy, this type of debt was presumptively non-dischargeable as a non-alimony debt “incurred by the debtor in the course of a divorce or separation or in connection with a separation agreement, divorce decree or other order of a court of record[.]” In re Clark, 207 B.R. 651, 655 (Bankr. E.D. Mo. 1997) (quoting 11 U.S.C. § 523(a)(15) (1994)).

The opinion goes on to analyze the notice requirements in effect at the time of Jeremy’s bankruptcy, and how failure to give Tiffiny notice affected her ability to file a timely objection. Those notice and objection requirements were changed by the 2005 amendments to the bankruptcy laws.

The important point here is that when you add hold-harmless language to your PSA you are creating a new debt between the parties that is most likely not dischargeable, is entirely separate and apart from the underlying obligation, and is enforceable via contempt in chancery court.

It would seem to me that even without the hold-harmless language the agreement between the parties is a separate contractual obligation that would be entirely enforceable; however, the authority cited by Judge Maxwell raises the point to a higher level and should remove all doubt if the hold-harmless language is included.

It’s simple to add that hold-harmless language to your PSA templates. It won’t hurt your client if she is the co-debtor who will not be paying the debt, and it just might make a crucial difference somewhere down the line — and that, after all, is your job.

No Judgment of Modification = No Modification

October 14, 2014 § Leave a comment

You’re going to have to read for yourself the MSSC’s decision in Shumake v. Shumake, handed down September 18, 2014. It’s a dizzying scenario involving a divorce judgment ordering payment of alimony, bankruptcy, petition to modify, contempt hearing, a temporary reduction of alimony, and subsequent contempt. The Special Chancellor ultimately found that ex-husband Leslie Shumake owed his ex-wife Katarina Shumake $58,550, plus interest, in alimony arrearage. Leslie appealed.

The case was first assigned to the COA. The court noted some confusion arising from language that the special chancellor had used in effecting a temporary reduction in alimony while bankruptcy payments were being made. In its November 23, 2013, opinion, the COA held, among other things, that on the unique facts of this case, it ” … would be fundamentally unfair to charge Leslie with a $58,550 arrearage …” and reversed and rendered that part of the judgment.

The COA granted cert and reversed the COA. Here’s what Justice King said for the unanimous court (Lamar not participating):

¶11. Originally, the chancellor ordered Leslie to pay Katarina $5,750 per month in periodic alimony. Leslie never met this obligation. Instead, he paid Katarina $650 per week in alimony. Katarina filed a contempt complaint asking the chancellor to require Leslie to comply with the divorce judgment. In response to Katarina’s contempt complaint, Leslie requested a modification, claiming that his extreme economic hardship had resulted in a substantial and material change in his circumstances. The chancellor then entered an order requiring Leslie to transfer his interest in the marital home to Katarina to cover part of the arrearage at that time. Leslie was to pay the remaining amount of the arrearage from cash. Of particular note, the chancellor did not modify the alimony or specifically address Leslie’s request for modification. Moreover, the order states that the chancellor “reserves the right to make a ruling regarding any arrearage and/or future arrearage . . . .”

¶12. According to the parties, the chancellor entered another order in November 2010 which required Leslie to pay Katarina $750 per week. This order is not in the record, although it was discussed at length at an April 2011 hearing, and the docket reflects that the chancellor entered an order at that time. At the hearing, Leslie argued that the November 2010 order temporarily modified the alimony. Katarina, on the other hand, maintained that Leslie was still required under the divorce judgment to pay $5,750 per month in alimony. Thus, Katarina claimed that Leslie owed $58,550 in arrears.

¶13. The [special] chancellor, who was not the chancellor who entered the divorce judgment or prior orders in the case, ultimately found that the previous chancellor never entered an order permanently modifying the original divorce judgment which required Leslie to pay $5,750 per month in alimony. Thus, the chancellor found that Leslie was in arrears for $58,550 to Katarina. The chancellor ordered that Leslie, upon completion of his bankruptcy payments, pay Katarina for the arrearage in monthly payments of $1,500.

¶14. After reviewing the record in today’s case and considering our law with respect to alimony modification, we cannot find that the chancellor abused his discretion. An alimony payment vests on the day it is due. Bowe [v. Bowe], 557 So. 2d [793] at 794 [(Miss. 1990)]. And a court order is required to modify alimony. Id. Because no order expressly modified Leslie’s alimony obligation, the [special] chancellor in today’s case did not abuse his discretion in ordering Leslie to pay the arrearage.

¶15. Further, the Court of Appeals’ statement that it would be “fundamentally unfair and unjust” to require Leslie to pay the arrearage is supported by neither our caselaw nor the chancellor’s order. The order considers – and provides some allowance for – Leslie’s bankruptcy by allowing him to pay the arrearage when the bankruptcy is complete. Our caselaw addressing the effect of bankruptcy on alimony payments is consistent with this approach. See Varner, 666 So. 2d at 497-98. Finally, the chancellor’s decision not to punish Leslie through contempt does not absolve Leslie’s arrearage. See Hand, Mississippi Divorce, Alimony, and Child Custody § 14-6 (“If the responding party is found to be in contempt and refuses or fails without justification to pay the arrearages as previously required by the court, he may be punished by civil or criminal sanctions, or both.”) (emphasis added). Put simply, Leslie’s alimony payments vested on the day they were due and the record does not support a finding that the vested payments were or should have been modified. The chancellor did not abuse his discretion in ordering Leslie to pay the arrearage. [Emphasis added]

There is a handful of lessons here:

  • Never walk away from a case until you are sure that every order that should have been entered has gotten entered. You can not rely on opposing counsel to agree with you to the terms of a missing order so as to reconstruct it. Even if counsel opposite wants to “do the right thing,” memories fade with the passage of time, and two honest people can remember the same event in quite different ways.
  • Without an order in which to rely, your client has no cover for his actions. That November order might have saved Leslie a lot of money because alimony payments become vested when they are due, and they can not be modified except by express order of the court.
  • Note the language about bankruptcy. In ¶10, the court points out that bankruptcy does not in all cases rise to the level of substantial change in circumstances that would warrant modification.

 

A BANKRUPTCY BUGABOO

November 1, 2012 § 1 Comment

Bankruptcy, particularly Chapter 7 liquidation, used to be such a complicating factor in chancery court. Divorce trials were held up for years while one or both parties pursued their arcane remedies in the alchemy of bankruptcy. Contempts and modifications were brought to a screeching halt. Everyone knew and feared the “automatic stay,” even if most did not even understand its scope and reach. 

And so it was that Ian Garcino, attempting to collect a divorce-related debt from his ex-wife, Amanda Noel, encountered the buzzsaw of bankruptcy and unwittingly suffered its bite.

In 2008, the chancery court awarded Ian a judgment against Amanda in the sum of $16,278, which the court ordered her to pay within 60 days. Amanda not only did not pay, but she filed a Chapter 7 bankruptcy petition.

Now, 11 USC § 523(a)(5), (15) excludes debts to spouses, ex-spouses, and children from the list of dischargeable matters. So Ian, no doubt out of an abundance of caution, penned a handwritten letter to the bankruptcy court advising the court that the debt in question arose out of a divorce property settlement between him and Amanda, and concluding that “Under applicable present bankruptcy laws this debt should not be discharged.”

The bankruptcy court treated Ian’s letter as a pleading initiating an adversary proceeding. That’s because, since 2005, the bankruptcy laws no longer require a party in Ian’s position to do anything, since the debt is in and of itself not dischargeable. When Ian filed his letter, he in essence put something into controversy that would have been beyond controversy had he done nothing.

Belatedly, Ian learned from a bankruptcy lawyer (who might have been able to give Ian some advice before he wrote the ill-fated letter) the folly of what he had done, but before Ian could take any action the bankruptcy court entered its order dismissing Ian’s proceeding due to his inaction.

Later, when Ian tried to execute on the judgment in chancery court, the chancellor granted a stay of execution finding that the debt was adjudicated to be discharged in bankruptcy court. Ian appealed.

In response to the appeal, Amanda raised two issues: One, that the chancery court lacked jurisdiction to adjudicate dischargeablility; and Two, that the bankruptcy court’s decision was res judicata on the issue of dischargeability, and was binding on the chancery court.

Judge Maxwell’s opinion in Garcino v. Noel, decided by the COA October 23, 2012, is one you should read for its exposition on the law of Chapter 7 bankruptcy vis a vis chancery practice. Here’s how the court disposed of the jurisdictional argument:

¶22. [Amanda’s] first suggested reason—that the chancery court lacked jurisdiction to make such a determination—is clearly wrong. “It is well established . . . that ‘bankruptcy courts and state courts maintain concurrent jurisdiction to decide exceptions to discharge arising under [section] 523(a)[.]’” Marvin v. Marvin, 659 S.E.2d 579, 581 (Va. Ct. App. 2008) (quoting Monsour v. Monsour (In re Monsour), 372 B.R. 272, 278 (Bankr. W.D. Va. 2007)). “Although only the bankruptcy court can decide whether to grant a discharge in bankruptcy, the effect of such a discharge may be determined by any court in which the issue is properly raised.” Burns v. Burns, 164 S.W.3d 99, 103 (Mo. Ct. App. 2005) (citing Timmons v. Timmons, 132 S.W.3d 906, 915 (Mo. Ct. App. 2004)); see also Rogers v. McGahee, 602 S.E.2d 582, 586 (Ga. 2004) (holding that “a general discharge in bankruptcy does not deprive the state court of its jurisdiction to determine whether certain debts of the debtor former spouse are exempt”) (citations omitted). [Footnote omitted]

The COA found, however, that the res judicata argument was dispositive. The court held that the four identities required for res judicata were present because Ian brought the same claim, that the debt had not been discharged, against the same party in both the chancery court and in the bankruptcy court. The court held at ¶ 26 that the bankruptcy court’s adjudication was one on the merits, making it binding on other courts.

There are several lessons you can take from this case: One is that you don’t need to blunder into bankruptcy court unless you know what you are doing and know the possible effects of your actions; Two, the burden now is on the Chapter 7 bankruptcy petitioner to convince the bankruptcy court to stay the judgment, not vice versa, so you may proceed in chancery as if there were no impediments; and Three, res judicata has teeth. 

PS … as Judge Maxwell’s opinion points out, this post is relevant to Chapter 7 bankruptcy, but it has limited applicability, if at all, to Chapter 13 and other forms of bankruptcy.

Where Am I?

You are currently browsing entries tagged with bankruptcy at The Better Chancery Practice Blog.